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From the team at myStockOptions.com and myNQDC.com, this blog offers news and commentaries on equity compensation and NQ deferred comp, educational tips on the related tax and financial planning, updates about new stuff at our websites, and sometimes the lighter side of the topics we cover. We aim to please both professionals and participants, and we do our best to keep the writing lively.

30 January 2012

Stock Comp Income & Withholding On Your Form W-2? Time For Our FAQs & Diagrams

Form W-2 is in the air—or, hopefully, safely in your mailbox or desk by now. If you had income from stock compensation or an employee stock purchase plan in 2011, you need to understand where that income is reported on the W-2 so that you can complete your tax return properly. In the award-winning Tax Center at myStockOptions.com, we have a series of FAQs dedicated to interpreting this sometimes cryptic document. These FAQs include annotated diagrams of Form W-2 that clearly show you around the form.

Stock Options

If you exercised nonqualified stock options last year, the income you recognized at exercise will be reported on your W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:

Box 1: Wages, tips, and other compensation

Box 3: Social Security wages (up to the income ceiling)

Box 5: Medicare wages and tips

Box 16: State wages, tips, etc. (if applicable)

Box 18: Local wages, tips, etc. (if applicable)

Box 12 (Code V)

That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights, with the exception that Code V is not used.)

With incentive stock options, the spread value appears on the W-2 only when you make what is technically called a disqualifying disposition, i.e. when you sell or gift the stock before you have met the required holding periods of one year from exercise and two years from grant. In that case the income appears on the W-2 as compensation income. Unlike with NQSOs, your company does not withhold federal taxes on ISO exercises and no money is owed for Social Security and Medicare, even with a same-day sale or any later disqualifying dispositions. For the details of W-2 reporting for ISOs in this situation, see our FAQ on this topic in the Tax Center.

Restricted Stock, RSUs, Performance Shares

The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. The treatment on the W-2 is essentially the same for all three grant types. Income appear in the following places:

Box 1: Wages, tips, and other compensation

Box 3: Social Security wages (to income ceiling)

Box 5: Medicare wages and tips

Box 16: State wages, tips, etc. (if applicable)

Box 18: Local wages, tips, etc. (if applicable)

To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs, including annotated diagrams, in the Tax Center.

Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.

Employee Stock Purchase Plans (ESPPs)

The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. With a tax-qualified ESPP, nothing appears on your W-2 until you sell the shares. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions.com.

Sell Shares In 2011? The Fun Ain't Over Yet

If you sold shares from stock compensation or an ESPP last year, you'll need more guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions.com features the section Reporting Company Stock Sales. Each FAQ in the section includes annotated diagrams of Form 8949 and Schedule D, the two crucial forms for stock-sale reporting.

Resources For Stock Plan Professionals

All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns. The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or info@mystockoptions.com).

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I have the situation with V code on W-2 stock options but I don't understand why the 1099-B under cost basis doesn't reflect the amt in code V. Was told by broker to add into cost basis. IRS gets the 1099B it will not reflect same # for cost basis? Your suggestions?